How Enterprise SaaS Companies Justify Investment in Customer Success
The Key Drivers for SaaS Success
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Transcript of The Key Drivers for SaaS Success
David SkokSerial Entrepreneur turned VC (Matrix Partners)
Author of ForEntrepreneurs Blog
The Key Drivers for SaaS Success
What Outputs do we
want to optimize?
Growth
ProfitabilityCash
What’s so different about SaaS?
Cash Impact of a typical deal
If cash flow is bad for one customer…
what happens when we grow, and add many more
customers?
Model: slow increase in the no of customers added every month
Cumulative Cash Flow
The SaaS Cash Flow Trough
“The thing that surprises many investors & boards of directors about the SaaS model is that, even with perfect execution, an acceleration of growth will often be accompanied by a squeeze on profitability and cash flow.”Ron Gill, CFO at Netsuite
What’s the impact of faster growth?
When your SaaS business is losing money at an increasing rate, how
can you tell if the business is going to work eventually?
Unit EconomicsA Powerful Tool
Unit Economics
Can I make more profit from my customers than it costs me to acquire them?
Unit Economics
Cost to Acquire a Customer Lifetime Value of a Customer
A Viable Business Model
First Guideline for SaaS Success
A Deeper Look at LTV
Computing LTV
Computing the Customer Lifetime
Customer Lifetime = 1Churn
So CHURN is an important driver
Customer Churn vs $ Dollar Churn
Customer Churn vs $ Dollar Churn
Customer Churn vs $ Dollar Churn
Customer 2 Churned50% Customer Churn83% $ Dollar Churn
Customer Churn vs $ Dollar Churn
Customer 1 Churned50% Customer Churn17% $ Dollar Churn
Customer Churn vs $ Dollar Churn
Customer 1 Churned50% Customer Churn-16% $ Dollar Churn
Negative Churn
Implies another part of the Sales Funnel
How do we get Expansion Revenue?
If we only have one SaaS product, what more can we
sell the customer?
Variable Pricing AxesA critical factor for expansion
revenue
Driving SaaS Success Using Key Metrics
Features
Driving SaaS Success Using Key Metrics
Features
Users
Driving SaaS Success Using Key Metrics
Features
Users
Depth of Usage
Examples:• Mailing list size• Database size• Amount of storage used
CASH
Another Important Variable:
Cash ConsumedHugely impacted by “Months to recover CAC”
Impact of Months to Recover CAC
Impact of Months to Recover CAC
Second Guideline for SaaS Success
More On CACThe impact of sales
complexity
Sales Complexity
How I assumed the two would relate
A rough estimate of CAC versus Sales Complexity
The relationship is roughly exponential
The Primary Unit of GrowthAdding a
Salesperson
Revenuevs
Expense
Month 1
Month 2
Month 3
Month 4
Month 5
Month 6
Month 7
Month 8
Month 9
Month 10
Month 11
Month 12
0
7500
15000
22500
30000
MRR
Expense
Losses
The SaaS Cash Flow Trough
What happens if wehire 2 sales people
every month?
What happens at the company level when we add 2 new sales hires every month?
Comparison: hiring one versus two sales people per month
Salesperson Unit Economics
CASH IN ADVANCE
Annual up-front paymentInstead of Monthly
What happens if we collect a year’s payment in advance?Looking at the whole company picture when hiring 2 salespeople per month
Summary
Summary
• Key Drivers of SaaS Success:• Months to recover CAC• LTV:CAC Ratio
Reduce CAC• Lower costs per lead• Increase Funnel conversion rates• Increase PPR (Productivity per Sales Rep)• Simplify your product• Reduce human touch
Increase LTV• Achieve Negative $ churn
• Improve product stickiness• Sell to the right customers• Nail On-boarding and Customer Success• Use variable pricing axes• Nail expansion sales
• Increase Gross Margin %• Increase average deal size
For more information…
Visit my blog:
www.forentrepreneurs.com
Full slide deck is available here:
www.forentrepreneurs.com/saastr
Appendix
Additional topics that would have been covered had there been more time
What Metrics should we use to measure a SaaS business?
We care about recurring revenue
MRR Monthly Recurring RevenueARR Annual Recurring Revenue
Driving SaaS Success Using Key Metrics
Always ask to see Bookings over TimeEntrepreneurs always happy to show their MRR over time. But this doesn’t tell whether their bookings are growing
Computing LTV
Computing LTV
But if $ Churn is negative, the formula breaks
Two things at play…
The net result for a single cohort…
When Lifetimes get too long…
We need to take into account:• Risks to the business
• Aging product• Changes in the market• Etc.
• The time value of Money
The Solution:
• Discount future cash flows
Real World LTV Calculator
• Use the spreadsheet provided here:• http://www.forentrepreneurs.com/ltv/
• Formulae involved:
Understanding Public SaaS Companies
Example Operating Model
Break apart Sales & Marketing
To make it comparable with a traditional software business, eliminate New Customer Sales, as those benefit the future
Now look at DRR (Dollar Retention Rate)
• Example DRR = 123% (Zendesk’s number)• The existing customer base with no additional
revenue is growing at 23% annually• So you have a business growing 23% year-on-
year, generating 20% profit
The Magic Number• In general, I don’t like the Magic Number
• Hard to explain and understand• BUT — a public company may not give:
• LTV:CAC ratio• Months to recover CAC
• So use Magic Number to calculate something roughly equivalent• First developed by Josh James, CEO of Omnivore• The key insight - if your Magic Number is:
• Above 0.75 — Step on the gas• Below 0.75 — Step back and look at your business• Below 0.5 — business probably not ready to expand
The Formula for Magic Number
Example Magic Number calculation
2008 Magic Number Graph
Single cohort with multiple churn rates
Months
% of cohort remaining